Janet Yellen is really asking for research into effective demand. She sees a weakness in aggregate demand affecting aggregate supply… or potential output. That is effective demand, but she cannot even use the term effective demand because economists do not understand it.
I have been researching effective demand for 4 years. I have seen really a complete lack of understanding of what effective demand is among economists. It surprises me that Janet Yellen would be calling for research on its dynamics....Janet Yellen just might understand more about Keynes and Post Keynesianism that she wants to let on publicly. She was excoriated as a "Keynesian" by economists on the right at the time of her appointment to the Fed chair. Maybe she is nudging without rocking the boat too much.
Has anyone read Yellen, Janet L, 1980. "On Keynesian Economics and the Economics of the Post-Keynesians," American Economic Review, American Economic Association, vol. 70(2), pages 15-25, May. (Link is to JSTOR. Registration required.)
She may be considered a New Keynesian, but this paper shows that she is at least familiar with some Post Keynesian thinking.
Yellen wants to understand effective demand
So whilst Janet gets empirically what is wrong with modern macro research she misses the fundamental reasons this matters.
Decisions, Decisions, Decisions
- Economics must be rebuilt around balance sheets and fundamental accounting identities
- Hence state – balance sheets- must be the basis of all models. If the model is not a state machine it cannot describe the state of anything economic.
- Hence credit and debt, and money matters
- As debt issues are fundamentally non linear and complex models which require linearisation, such as DGSE, must be discarded, they are too broken to be fixed.
Yellen Almost, but not Quite, Gets Whats wrong with Modern MacroAndrew Lainton